12 Feb, 2020
An FHA 203(k) Streamline Loan Primer
You found a new home. It’s dreamy and nearly perfect. But just like most relationships require some work, your new home could use some TLC.
You are a visionary though. You see the potential. It may need updated cabinets, new floors or even a new roof. Not to worry, there is a loan option available just for you.
Here are a few key insights when considering an FHA 203(k) streamline loan. (These loans go by many names including a limited 203(k) mortgage, renovation loan, construction loan and 203(k) rehab loan.)
Repair, Update and Purchase
With an FHA 203(k) streamline loan, you may purchase and renovate your new home with a single loan. That means one closing and one set of closing costs. Homes that may not qualify for other types of financing because of their condition may be eligible. And you may receive up to $35,000* plus the cost for energy improvements.**
Types of streamline renovations and repairs include:
- New roofing and gutters
- Kitchen or bath remodel
- New appliances
- Plumbing and electrical upgrades or repairs
- New HVAC system
- Basement finishing
- Painting and lead-based paint abatement
- Pool repairs
- New flooring
- Window and door replacements
- Accessibility improvements for disabled persons
- Weatherization and energy efficiency improvements
* Must include fees, contingency reserve & repairs.
** Dollar limits apply. Energy Efficient Mortgage Program improvements must reduce energy expense of a home to qualify. Examples of qualifying improvements include central heating/cooling, wall heating unit replacements, test and seal duct work, dual pane or low E windows and sliding doors, exterior doors and sunscreens, attic and wall insulation and water heater replacement.
No luxury upgrades or structural repairs are allowed under a limited 203(k) loan.
Who is Eligible?
Would-be owners may apply for an FHA 203(k) loan for their primary residence. The loans have a low minimum credit score requirement. Although they are geared towards single-family homes, condo and townhouse owners may receive 203(k) funding for interior projects.
A 90-Day Window
Contractors are paid by funds that pass through an escrow account, so you do not have to worry about payments after closing. Half of the contractor’s bid amount can be released at closing. Best of all, the work must be completed within a 90-day window, so you won’t have to live in an indefinite construction zone.
Let’s say you’re a go-getter and want to do all the work yourself or have your second cousin take care of the repairs and renovations. You must, however, hire a licensed, lender-approved contractor. The contractor will need to understand how to complete the required paperwork and be able to complete the project within the given timeframe. Work must start within 30 days of closing.
So you’ve decided to apply for an FHA 203(k) loan. Here are some final important considerations before making that final plunge.
In general FHA 203(k) loans take longer to complete than standard loans. The process calls for both buyer and contractor to complete additional loan paperwork including a work plan with cost estimates. You’ll need to work with an experienced FHA-approved lender who understands the ins and outs of this type of loan.
Keep in mind that you will need a down payment of at least 3.5%. You can use gift funds from family members to pay all of your required down payment, closing costs, prepaid expenses and discount points. Note that FHA 203(k) loans do come with higher rates and fees compared to standard loans.
An FHA 203(k) loan is an umbrella term that also includes a renovation refinance loan and a standard 203(k) loan, a more complex process that allows for much larger amounts of cash and more major repairs, but requires the hiring of a HUD-approved consultant.
We’d love to hear from you! Feel free to contact us today with any 203(k) loan questions.